IRS Overpaid Low-Income Tax Credit by $132 Billion

MOST POPULAR

In the last decade the Internal Revenue Service has improperly paid up to $132.6 billion in refunds through the Earned Income Tax Credit (EITC) aimed at assisting low-income families with children, an IRS Inspector General report found.

According to Treasury Department deputy inspector general Michael McKenney, author of the report, the IRS also failed to fulfill the requirements of the Improper Payment Eliminations Act, signed by President Obama in 2010. For the last decade, it had also failed to meet Congress’ request to reign in billions in overpayment.

“The IRS has made little improvement in reducing EITC improper payments since being required to report estimates of these payments to Congress,” the report, dated in February but released this week, determined. “The IRS has previously acknowledged that further reductions in the EITC error rate will be difficult to achieve.”

The report did not give a definitive reason for the overpayments. In a statement, IRS spokesperson Dean Patterson said, “errors arise from a variety of sources, including the complex nature of the law, the ever shifting EITC-eligible population and the nature of the credit.”

"We have a multi-faceted and aggressive program that employs a series of traditional and nontraditional enforcement tools," Patterson said. "We will continue to work hard to get the credit to those who are eligible, while protecting against improper payments."

Under the Improper Payment Eliminations Act, the IRS is required to get the overpayment rate – the percentage of improperly paid refunds -- under 10 percent. But as the report shows, overpayments have been well above that target since 2003.

As the chart below shows, in 2003 the maximum overpayment rate was 30 percent, costing the government $11.5 billion. In 2008, the maximum overpayment rate was 28 percent, resulting in improper refunds of $13.1 billion. Last year, the IRS paid a maximum of $13.6 billion.

According to the IRS, these numbers are just a best guess: There were likely other overpayments that it was unable to locate.

“The IRS indicated in its Fiscal Year 2012 … reporting that EITC underpayments ‘do not appear with sufficient frequency in the statistically valid test data to have a measurable effect on the estimate,’” the inspector general found.

Finally, the report found that this problem is likely to persist in the future. The IG determined that the IRS did not have the proper mechanisms in place to correct the overpayment problem, and that bureaucratic obstacles make it difficult to take the action necessary to prevent overpayments in the future.

“While IRS management agreed with our recommendations [to cut down on overpayments], the IRS cannot change the risk assessment process ... without the consent of the Department of the Treasury,” the IG found.